On November $25,$ Year $4,$ an explosion occurred at a Rex Co$.$ plant causing extensive property damage to area buildings. By March $10,$ Year $5,$ claims had been asserted against Rex. Rex$$s management and counsel concluded that it is probable Rex will be responsible for damages, and that $$3\mathrm{.}5$ million would be a reasonable estimate of its liability. Rex$$s $$10$ million comprehensive public liability policy has a $$500,000$ deductible clause. Rex$$s December $31,$ Year $4,$ financial statements, issued on March $25,$ Year $5,$ should report this item as

A disclosure in the notes to the financial statements indicating the probable loss of $$500,000.$

An accrued liability of $$500,000.$

An accrued liability of $$3\mathrm{.}5$ million.

A disclosure in the notes to the financial statements indicating the probable loss of $$3\mathrm{.}5$ million.